Tesco's New Concept to Put Pressure on Department Stores

Harrods need not be concerned but Debenhams, Marks and Spencer and others may have a new and formidable competitor in the form of a new department store concept from Tesco.

According to a report by the Financial Times, Tesco is looking for large, multi-level locations in town centers to open a new format that will sell apparel, consumer electronics, jewelry and housewares in addition to groceries. Consumers would be able to move between floors using "travelators" equipped to handle shopping carts.

The new department store concept seems a next step from Tesco's Extra hypermarket format. According to the Financial Times, the retailer currently operates 150 Extra stores in the U.K. and is looking to add more.

Jonathan Pritchard, analyst at Oriel Securities, said, "Flexing the Extra model for town centers was clearly going to be the next development in the format, and just when you thought it was safe in the high street waters the biggest shark is on the prowl again."

While one marketing document obtained by the Financial Times described the town center stores as a "whole new concept," the company said it is "not a new format."

Discussion Question: Is opening a department store a logical next step for retailers operating hypermarket or supercenter formats? Do you see multi-floor town center locations becoming increasingly important for big box retailers that primarily operate single-floor standalone stores?

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Comments:

This story brings forth more questions than comments: (1) where are these stores planned: UK, EU, US? (2) is the format properly described as a "department store"? (as I understand it, the primary criteria for such is that it derives most of it volume from clothes, but also has a mix of other departments; and I think there is some expectation of service as well--Macy's notwithstanding...so why is this concept not described as (just) a discounter?)

Of course everything Tesco does of late seems to generate press, which of course, may be the main idea.

'notcom'

I find it interesting that so many people are discounting this concept, and stating that it would not work in the US. Walk into the Whole Foods store in Union Square, and see how well that multi-level store works. Imagine that Whole Foods added another level selling natural organic cotton clothes, as well as featuring electronics that are focused on sustainable living (mini wind-power machines, etc.). This concept would absolutely work in urban centers such s New York, Chicago, Boston, SF, Minneapolis, etc.

Tesco will find the right mix of products, and the right format in which to make this work. Don't be surprised if they bring a similar format to the US market. Innovative retailing is the same, whether it is in Europe, the US, Asia, etc. Hasn't the IKEA invasion taught us that?

Joel Warady, Chief Marketing Officer, Enjoy Life Foods

This is good news for cities where a new format 'Tesco Department Store' might open. For many years Tesco and other big boxes have been sucking business out of town centres by locating out of town.

Recently, planners in the UK have made it increasingly difficult to get permission for these, whereas they would welcome multi-story city centre developments. Certainly, existing department stores won't enjoy the prospect, but many other city centre businesses may feel relieved that there appears to be some life in the town centre location yet.

'CJephson'

Tesco's town center department store concept is a great real estate disruptor strategy. Most UK town centers are based upon real estate infrastructure that hasn't meaningfully grown or changed in 50 years. So it's almost impossible for a new competitor to find big box square footage all on a single level. Tesco believes that they can make money using multiple levels, and given the higher margins achieved by town center competitors, they may be right.

Mark Lilien, Consultant, Retail Technology Group

I am not sure if this or any of the strategies Tesco has successfully implemented in the UK and other countries will work for them in the US or not, but they sure seem to have psyched out the US Retail sector with one news item after the other. The good thing is that it's pushing a lot of retailers to think out of the box and get out of their comfort zone. So one way or the other it may end up benefiting the Retail Sector in the US. Change is the precursor to evolution.

The recent interest in the town center concept is a great example of how long it takes US retailing to adopt practices from overseas. The challenge lies in how well the translation fits into our society's complex set of lifestyles. European hypermarkets invaded a couple of decades ago and the survivors have been integrated into the retail mix where they fit.

Multi-floor retailing and town centers have been in place in Europe since WWII, when the move to bigger stores was constrained by space limits. We don't have the same appreciation for space efficiencies here because we have been able to develop urban areas by spreading out. Town centers work here in two contexts: where cars bring in the population and where feet do. The first is where the developers appear to be placing big bets. To win this game, however, they need the most attractive retailers in the nation to draw shoppers. Some are also adding condos, hoping to create resident/consumers. As with any new and huge construction project, however, rent/ownership is steep.

Re-gentrified neighborhoods look economically feasible here, especially for the multi-floor retailer offering. The 3D supermarket concept is still fairly new in the US. It should add an element of excitement, if done right. Look at what IKEA did.

I would have to agree with Len that this type of store may have some legs in our cities. While the diversity of retail stores within walking distance of a typical apartment-dweller would be an obstacle, grocery has always been a problem in NYC. Building on that base and offering other suburban-style retail experiences is worth a try in the urban setting.

Jeff Weitzman, CMO, Buysight, Inc.

Obviously the European retail environment is different from the US market. Significantly more shopping is done in the cities than in the outlying suburbs, where city stores were reluctant to open. In addition, Europeans are much more apt to make food purchases on a daily basis due to smaller apartments, compact refrigerators and their desire for fresh foods.

Tesco's move seems to me to be an opportunity to capitalize on the lack of quality retail outside the major cities. The real question is the type of store that Tesco has in mind. Is there a real opportunity to merge a supermarket and department store into a manageable size enabling the consumer to enjoy a "one stop shop" close to home, alleviating the pressure of carrying their purchases home from work? Is it necessary to build a multi-level facility as a large single floor space is not suited to the "town center" format? And is it possible to make a multi-level venue successful when sales levels by floor decrease substantially as one leaves the main level?

Tesco is a smart operator and certainly sees a gap in their market. This will be an interesting experiment to follow but most likely one that will not cross the pond to America.

Peter N. Schaeffer, Partner, Carl Marks Advisory Group

While I don't know much about Tesco, I wouldn't lump stores that cross market groceries and other goods (clothing, electronics) into the Wal-Mart and Target box either.

Kroger's Fred Meyer stores which have been operating in the NW area for 80+ years do this quite successfully and don't have a WM or Target feel to them at all. Quite the opposite--they market more upscale brands and push organics and natural with very well put together bakeries, produce departments, meat departments, etc. A few of them are multi-level, particularly in the downtown areas. They attract a more urban shopper who is looking for quality and convenience for one-stop shopping that isn't WM or target, so Tesco could just come in and do well with that demographic.

Affordable quality is what many shoppers want.

Julie Parrish, Web Publisher, Coupon Girls, LLC

Don't be so quick to dismiss either Tesco or its city center format.

For years, I've heard people say that Europe is not like the U.S. To some extent this may be true. However, a run of the mill apartment in New York City is not that much different than London, Berlin, Paris, etc. It is small with little room for storage. These are not pantry-load markets.

However, if you look at inner city markets like NYC, Los Angeles and others, you will see a number of retailers--even Home Depot--making use of vertical retailing. How they will merchandise these stores is another question. But it is a trend definitely worth watching.

Len Lewis, President, Lewis Communications, Inc.

Just this past weekend, we observed shoppers in Target's multilevel city center format in Stamford CT. The store has become a mecca for urban professional dweller running in at 7PM to grab something quick for dinner. The 20somethings we chatted with had bought complete dinner pasta and frozen veggies for 3 and picked up two new DVDs on impulse. One also grabbed a hot new sweater bragging that coming in for dinner helps her keep up with the most fashionable seasonal stock.

Counter to lots of the points above, we believe Tesco's convenient fresh meal focus would be a great way to draw shoppers in frequently. The challenge will be staying focused on the right food mix and surrounding it with complementary higher margin products that distract just enough.

Alison Chaltas, EVP, GfK

This past week in Los Angeles, I walked through a multi-story Wal-Mart and a multi-story Target and noted that in ether case the "feeling" didn't seem right. That's not to say it doesn't work. I think that the traditional big box stores need a slightly different format or variation in their design and business planning to give them the right feel without disrupting consistency and image.

It might be a good model for Europe but in the US the mix won't work. Lifestyle centers and other concepts have come too far to allow Tesco's proposed blended format to take hold in the US. Sears of course tried this and quickly saw it didn't work...not that Tesco is anything close to Sears.

Mark Hunter, President, TheSalesHunter.com

Multi-floor department stores are not just a European concept; there are plenty of them in Asia as well.

As far as the US, success depends upon where these new stores are located. In those cities undergoing refurbishment of inner city areas with apartments and condos, there is a need for shopping. Given the space that is available, multi-floor stores are a reasonable alternative. After all, didn't the old multi-story department stores use that concept?

Depending upon who lives or works in the area, what their shopping needs are, and what Tesco offers, this concept certainly could work. Providing the right assortment of products will be a challenge--will the goods appeal to those living in the expensive downtown condos or the office workers commuting to and from their homes?